7 reasons to refinance when you're young

Every financial decision you make should be made within the context of your individual circumstances, including the choice to refinance. For many older homeowners, paying off their mortgage prior to retirement is a priority that influences their mortgage loan decisions. And while younger homeowners may love the idea of living mortgage-free, their financial circumstances may not allow them to take the path to a quick loan repayment. To help clarify your goals and define your strategy, consider these seven reasons to refinance.

7 reasons to refinance

Lowering your monthly payment. If you can reduce your interest rate and refinance into another 30-year fixed-rate mortgage, your monthly payments will be lower. This can be especially helpful if you anticipate a reduced income in the future. In fact, many homeowners opt to refinance into a 30-year fixed-rate loan even if they can afford the payments on a shorter mortgage, particularly when they are young, because this gives them the safety net of a low mortgage payment. You can always pay extra on your mortgage to pay if off faster.

Paying off debt. If you have enough home equity, typically 15 to 20 percent or more, you may be able to qualify for a cash-out refinance, essentially borrowing money from your home. Alternatively, you can simply refinance to lower your payments and use the savings to pay down other debt more quickly.

Increasing your cash flow. Many young homeowners lack an emergency fund or are not fully participating in a retirement savings plan or making other investments because too much of their income goes to their mortgage. Reducing your payment can allow you to make other investments for your future.

Eliminating private mortgage insurance. If you pay private mortgage insurance now and have nearly enough equity to get rid of it, you can refinance and pay down your balance to cut your housing payments even more.

Switching to a fixed-rate loan. Locking in a long-term low mortgage rate is a wise move, since interest rates are unlikely to be this low in the future.

Paying for college. Many young homeowners need to save for their children's college tuition, but you may want to pay off your own student loans or begin paying tuition for older kids now. Pulling cash out of your home or lowering your payments can help.

Shortening your loan term. If you can easily handle the mortgage payments on a shorter loan with a 15- or 20-year term, your best bet would be to refinance into one of these loans so you can build equity more quickly.

Define your refinancing strategy

Once you have established what your goal is for refinancing, you'll need to make some calculations to determine whether the numbers make sense for you.

Second, estimate your home's value in today's market to see if you have enough home equity to refinance. If you have less than 20 percent in equity, you may be required to pay private mortgage insurance, which could make refinancing less beneficial. Lenders typically want at least 5 to 10 percent in home equity in order to approve a mortgage refinance.

Regardless of your reason for refinancing, make sure you work with a lender who can compare the pros and cons of all your mortgage options to find your best fit.